Thank you for your patience. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2025 Results Conference Call. The conference is being recorded. I would now like to turn the call over to Sumit Kundu from Investor Relations. Please proceed.

Thank you, operator, and good morning. Welcome to Ballard's Second Quarter Financial and Operating Results Conference Call. Joining me today is Marty Neese, Ballard's new President and Chief Executive Officer; and Jay Murray, our Vice President of Finance and Corporate Controller, who is stepping in for Kate Igbalode this quarter. We will be making forward-looking statements that are based on management's current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I'll now turn the call over to Marty.

Thanks, Sumit. Good morning, everyone. As this is my first earnings call as CEO of Ballard, I'd like to begin by sharing some of my background and the principles I bring to Ballard. I apologize in advance for talking a bit about myself, but I believe context is important, both for understanding the journey that brought me here and the perspective I bring to our path forward. As the saying goes, the sum of your past moments is what led you to today. My journey includes leadership roles in both Fortune 100 companies like Flex and innovation-driven start-ups like Verdagy. I've led product and service businesses, publicly traded companies and venture-backed teams. Each experience has reinforced my belief that there are always better ways to do things and that success lies in execution, innovation and delivering meaningful value to customers. I spent the first 15 years of my career in the electronic manufacturing services or the EMS industry. That experience shaped my understanding of the value of disciplined execution and cost control, delivering products with precision, frugality and extraordinary service. In EMS, success is earned through reliability, working capital efficiency and constant operational rigor. The past 18 years of my career have been focused on clean tech, serving as COO at SunPower, a vertically integrated public solar company and most recently as CEO of the hydrogen electrolyzer startup. These roles were centered on innovation-led value creation. First, to reach grid parity in solar and then to unlock fossil parity for green hydrogen. The importance of technical excellence, product innovation, urgency and establishing bankability was constant throughout. In 2015, I joined Ballard's Board. Now as CEO, I'm both grateful and excited to lead this company. Ballard has over 45 years of history pioneering and educating the world on the promise of hydrogen fuel cells. In recent years, we've transitioned from being primarily a technology development and solutions company to a product company with growing commercial traction in bus, rail, marine, stationary power and material handling. That transition hasn't been easy and it hasn't been linear. Tailwinds in policy and market enthusiasm have shifted in recent years. As we face new headwinds, uncertainty, changing regulations, tariffs and delayed adoption in certain sectors, we must evolve again. That change starts with me. We are charting a course toward becoming a sustainable cash flow positive business by the end of 2027. To do that, we are aligning around what I believe are universal truths for any successful business, including Ballard. The value of execution and cost. Execution is fundamental. It starts with understanding, simplifying and reducing our costs across our operations, our products and our processes and coupling cost improvements with disciplined capital management. Our recent investments in automated manufacturing of MEAs and bipolar plates gives us a cost reduction advantage we intend to fully leverage. The value of service. Commercial success is earned from customer success, winning on total cost of ownership and delivering real measurable customer value is how we win. Just as important, our customers need to be willing to understand and pay for this delivered value. That's how we build a self-sustaining business. The value of innovation. Innovation is not just about technology. It's about products, services, business models and partnerships from stack improvements to value-added balance of plant and from product simplification to customer-centric design. We are relentlessly focused on developing better, safer, higher-value solutions. As the saying goes, a designer knows he has achieved perfection not when there is nothing more to add, but when there is nothing left to take away. That’s the mindset we bring to product development. The customer feedback we are receiving is very encouraging and bodes well for the future of our new products in development. We also see innovation opportunities beyond the product across our business model, supply chain and go-to-market approach. The value of deep experience and brand. Ballard has delivered over 300 million kilometers of fuel cell-powered transportation, more than any competitor by far. We have the most durable products, the best delivered total cost of ownership and a globally respected brand. Our reputation and technical depth are tremendous assets that we will continue to build upon. The path forward. We are taking a hard look at markets that are not moving as fast as expected. For example, we are adjusting our investments in the heavy-duty truck sector. These are hard choices, but they are necessary to maintain focus and discipline. Our recent realignment and headcount reduction efforts structurally lower our cost base and allow us to redirect resources toward near-term opportunities where we see clear product market fit and margin improvement potential. We are now supplementing our industry-leading innovation culture with a focus on continuous improvement, operational rigor, capital discipline and customer value delivery. Ballard's foundation is strong. We have no debt, no immediate capital needs and an unmatched global team. This is why I joined and why I'm optimistic about the future we're building together. We'll provide more detail on financial implications of our restructuring on the Q3 call, and you can expect near-term updates on key strategic focus areas. We're also planning our next Ballard Capital Markets Day expected to take place in 2026, where we'll share more about our path forward. Moving to our Q2 performance. We delivered a solid quarter, leading to an increase in revenue of 11% year-over-year, with growth specifically in the rail vertical. Gross margin improved by 24 points, reflecting cost efficiencies driven by our 2024 restructuring activities and a net reduction in onerous contract provisions. Despite soft order intake in Q2 of $8.3 million, we are progressing with key customers across our verticals. Notably, after the quarter, we secured one of the largest marine orders in our history with eCap and Samskip. Deliveries in the bus and rail segments remained on pace, and we are seeing renewed interest in material handling opportunities. We are also on schedule and progressing on Project Forge, our high-volume bipolar plate automated manufacturing initiative. This is a foundational element of our product cost reduction strategy. Before I hand the call over to Jay, I will reiterate this. We believe deeply in the role of hydrogen and fuel cells to decarbonize key sectors of the global economy. While market adoption remains uneven, Ballard is taking steps needed to lead over the long term with discipline, clarity and resilience. Jay, over to you.

Thanks, Marty. As Marty mentioned, total revenue for Q2 was $17.8 million, up 11% year-over-year. The heavy-duty mobility market contributed $16.1 million, driven by bus and rail shipments. Gross margin improved to negative 8%, up 24 points compared to Q2 of last year. This improvement was due primarily to lower manufacturing overhead costs as a result of our September 2024 restructuring and a net reduction in onerous contract provisions. Total operating expenses were $31.7 million, down 12% year-over-year. However, excluding initial restructuring and related charges of $5.9 million incurred in Q2 on our recent realignment and headcount reduction efforts, operating expenses decreased by 28% compared to Q2 of 2024. Cash operating costs declined similarly to $22.7 million, a 27% year-over-year reduction. Adjusted EBITDA was negative $30.6 million, a 13% improvement from negative $35.4 million last year, reflecting improved gross margin performance and lower operating costs, partially offset by an increase in restructuring expenses. Cash used by operating activities was $20.3 million, a 42% improvement versus Q2 of last year, reflecting lower cash operating losses combined with improved working capital. We closed the quarter with $550 million in cash and cash equivalents, no bank debt and remain confident in our ability to fund operations and strategic initiatives without near-term financing. Finally, we expect full year capital expenditure and operating expenses, excluding restructuring charges, to come at the low end of our guidance ranges for 2025. Including restructuring charges, restructuring to further reduce our operating cost structure and capital spend, we will update both our operating expense and capital spend guidance as part of Q3 reporting as appropriate. With that, I'll turn the call over to the operator for questions.

The first question comes from Rob Brown with Lake Street Capital Markets.

Just on the markets that you see that are sort of seeing near-term activity, I think rail and marine in particular, you've talked about, but what are the kind of the near-term markets you're pursuing? And maybe how do you approach those markets now with sort of the different cost structure?

Yes. So thanks for the question, Rob. In addition to the rail and marine market that you mentioned, we're seeing really good traction and a value proposition of significance in the bus market, both in North America and in Europe. And what really drives there is the total cost of ownership delivered for the asset owner operating a fleet or a bus. Hydrogen has a very strong role to play there and is winning specifically when you start seeing larger fleets where, let's say, battery electric buses are limited in their ability to scale up infrastructure and the cost of the additional infrastructure required for charging and other things in battery electric make those markets a little less attractive and make hydrogen a more favored solution as you go forward. So we're seeing that transition play out in real time.

Okay. Great. And then could you give us some color on the marine order that you announced after the quarter end, sort of what's driven that and some of the outcomes you're looking for there?

Yes, that order has a sales cycle of about two years to bring it to completion. This is not a product cycle that allows for frequent shipments every three months. It has taken a couple of years to develop. If I'm correct, it is 6.3 megawatts in size, which is excellent. It utilizes our FCwave product that was developed some time ago. This presents an appealing opportunity in the long term as it meets the necessary range and route requirements along with the appropriate fueling infrastructure. The ability to adapt to that infrastructure is crucial. It will be interesting to observe how this market develops as more people learn how to transition marine vehicles and what it could mean for route optimization with the growing hydrogen infrastructure in key ports in the region.

The next question comes from Jeffrey Osborne with TD Cowen.

And just a couple of questions on my side. I was curious if we could just run through the OpEx cadence that you had in Q2. And then it sounds like there'll be more detail on Q3, but just trying to figure out what the new run rate will be. Is it similar to Q2? Or any details you could help articulate that? And then any restructuring charges that would flow through in Q3 that we should be modeling? Or was all of that incurred in Q2?

Yes. So it was not all incurred in Q2. And Jay, do you want to provide a little bit more color from there?

Yes. We recently announced July restructuring. Most of the charges related to that will be incurred in Q2. We're not disclosing the amount now as we continue to work through the details of that. There was a CEO transition in there, and part of those costs are reflected in the Q2 restructuring numbers. I would say this recent restructuring in July is expected to reduce go-forward operating costs by another 30% with most of those realized in 2026. We'll see some benefit in the last half of the year, but not the full benefit.

Got it. And then if I heard you right, you talked about realigning the business to be cash flow positive exiting '27 or it was unclear if it was exiting or for the full year of '27. But do you have like a framework on what you're aiming to achieve to get there? Is that sort of 15% to 20% gross margins and then the OpEx cuts that you're announcing now are aligned to match that and get you to sort of EBITDA cash flow neutral? Or just how do we think about like what the financial parameters are to make that statement?

Yes. So it is exiting 2027. It's not for the full year 2027. And yes, we have essentially a 10-quarter waterfall of how we'll get the gross margins expanded to the appropriate level and the cost reduced to the appropriate level. And we're refining that model as we progress through Q3. And just to go back a second, just a quick annotation. Jay mentioned the restructuring charges were in Q2. You meant some of the restructuring charges were in Q2. The bulk of the restructuring charges will be in Q3. So just making that quick edit on the fly.

You're suggesting that the change in Q2 will be significantly higher in Q3, but you're not providing a specific number. Is that correct?

That's correct.

Got it. I think that's all I had. As it relates to the pipeline of orders that you're chasing for the second half of the year, you alluded to strength and following up on Rob Brown's question, rail and bus, et cetera. But I think you mentioned Marty, material handling. What are you seeing in that market?

Yes. We're seeing some green shoots in stack replacements. We're not actively doing battery box replacements or anything like that. That's not our core; however, we are seeing various integrators and OEMs talking to us about stack replacement as they start seeing the need for higher-performing stacks with greater durability and they're looking for ways to lower their total service costs of addressing that space. And we play extraordinarily well in that domain with the stack lifetimes that we've been able to achieve. So they're quite interested.

The next question comes from Mac Whale with Cormark Securities.

I would like to know if you have any concerns that by focusing on currently ready markets, such as the attractive bus total cost of ownership, you might fall behind in technology development for future markets like trucks. It seems that technology for trucks may require a more significant cost reduction and performance improvements. Can you explain how you are ensuring that you're prepared for those future opportunities?

Yes. I would say that a couple of things. One is the core technology that continues to evolve and improve is the stack. And when you think about the fungibility of the stack across all the different applications, making meaningful progress on durability and lifetime and efficiency and all the key customer metrics that translates across all the verticals. So that march is going on now. Additionally, we're seeing markets like truck being more like 2030 and beyond. And so we've got plenty of time as you start thinking about market signals, if we were needing to adapt further, we could adapt from there. Lastly, I'd say that all of the markets are let's say, commercially sensitive and understanding the total cost of ownership explicitly end-to-end is the work product that we've got going on now that will serve us no matter what market we're entering now or in the future. And really, that's about getting the delivered value explicitly characterized so that we know exactly what the CapEx is, what the OpEx is and the lifetime of the asset we're trying to serve and ensuring that we're developing a product and a service portfolio that addresses it appropriately.

Okay. So yes, it would be helpful next year, looking forward to that Capital Markets Day to dig in on a lot of these issues...

Absolutely.

Our next question comes from Craig Dettary with Raymond James.

I think in the quarter though, there was a $2 million backlog adjustment being pulled out. Could we see more pieces of the business being exited? What are some of the margin profiles of the backlog? And are there pieces of the business that you may view as suboptimal or unattractive?

Yes. So in the case of that particular reversal, Jay, do you have the particulars on that particular...

Not right now.

Okay. So sorry, Fred, I'm not going to be able to get you the exact name of that particular reversal or what that market was. It's just too new for me at the moment. That said, we are establishing and improving our pricing disciplines and what opportunities meet a threshold and a hurdle rate and what opportunities do not. And when an opportunity does not meet a hurdle rate, that doesn't mean that we suspend work in that particular vertical or that customer account. It means we have to be more creative on the balance between a CapEx and an OpEx model and understanding what the customer is solving for. Are they solving for upfront costs? Are they solving for lifetime costs? And do we know the difference in how to price it accordingly? So I would just say that we've got more maturation to do in value pricing and making sure that the markets we're serving and the products we're delivering to those markets have a fit and they have a value proposition that wins and the customer recognizes that value and is willing to pay for it, whether it's upfront in the CapEx or whether it's ongoing in the services.

Okay. And I see in the MD&A, there's still mention of the Rockwall, Texas facility being pushed out to be reviewed in 2026. Just wanted to know internally, what are you looking at specifically to give you the confidence if the facility were to get a go ahead, what sort of metrics are you using externally to sort of think about that?

Yes. This is part of my operational heritage, if you will. The first order effect for me as a former ops person is you always strive for more out of your installed capacity. And so as we look for ways to be more process efficient, and to see the benefits of our automation coming in, we'll keep looking at our overall capacity and understanding how much available capacity we have to address the markets that we're targeting and then what the role of a Texas facility would or would not do to help us on the capacity front. As we sit today, we're still on pause in Texas without a need for that additional capacity on the horizon. So we'll revisit that statement as we see the market evolve over the next couple of quarters. But as we head into 2026, we should be able to get to a more certain outcome.

The next question comes from Craig Irwin with ROTH Capital Partners.

So Marty, I definitely appreciate the fresh look at the business model over at Ballard. Positive cash flows by the end of '27, not so many fuel cell companies have had positive cash flows even for very brief periods. A much more important milestone, I think, for investors is positive gross margins and maybe margins above a certain threshold of maybe 15% or 20%. Can you maybe talk about what might have you pause as far as putting out the margin target for investors? Do we need to get past commitments in backlog where pricing might not have used the same discipline that you're going to bring over the next couple of years? Or are there other structural items that we might need to consider as you work towards this impressive goal of positive cash flows?

Yes. I would say it this way. I think there's an opportunity for us to do a few things at the same time. So while we have a backlog of orders that was derived prior to me, let's say, that doesn't mean that we don't have active engagements with those strategic customers, and we're not actively looking at ways to deliver lower product costs for them, while at the same time, improving our own margins simultaneously. So we share the benefit of a cost road map and at the same time, that helps them, that helps us. And so I would say that when you think about the backlog, you think about how we would improve that order book and how we would exchange value with those customers. And when I say that, that includes at the CapEx level and on the overall servicing of the account level. So think of it as total delivered value from the customer service standpoint with upfront and follow-on cost reductions and service improvements.

Understood. That makes sense. One aspect that seemed to be lacking at Ballard in the past, at least from my perspective and that of many investors, was a fuel strategy. Ballard was primarily relying on the idea that customers would figure it out rather than adopting a more proactive and strategic approach. Can you discuss whether fuel strategy considerations are currently part of your focus? How do you believe the team has supported customers in the fuel area over the past few years, especially as they explore different methods for acquiring hydrogen? Is this something that deserves attention as you aim for positive cash flows in the future?

Well, I'll give you a quick response, which is I just spent 4 years trying to develop partnerships on the other side of the table as a molecule producer. And the partnerships required to deliver the total cost of ownership end-to-end for any one of our verticals require thoughtful partnerships on fuels. To the extent that we can be more of a value add in that discussion with the right kind of strategic partners and bring the right type of imputed mileage, if you will, to bear on their offtake requirements. I think those are exchanges that would be welcome from molecule producers. Put it this way, if I had an opportunity to partner with Ballard at my last company, I would have loved to have done so.

Yes. Welcome aboard, Marty. My question has to do with China. Can you sum up our activities, our present activities in China and the outlook there?

Thank you for the question. We are currently pausing our activities in China and have not made any investments in the past quarter. Moving forward, we aim to clarify how China fits into our portfolio. We are still purchasing components from China, as it remains a vital part of our supply chain. However, the demand situation in the Chinese market is uncertain, so we have stopped pursuing demand opportunities there and are focusing on the supply side to help reduce costs for our customers.

This concludes the question-and-answer session. I would like to turn the conference back over to Marty Neese for any closing remarks. Please go ahead.

Thank you for joining us today. As I mentioned, Ballard is focused, aligned and operating with urgency. We will continue to take decisive actions to build a more capital-efficient, disciplined and commercially focused company. We look forward to updating you on our progress next quarter. Thank you very much.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.